Last month, we looked at what financial bias is, but what is it that influences our decisions? Where do these biases come from?

There are numerous ways bias can affect the financial decisions we need to make and can mean we’re not focusing on logic. We’re all prone to letting biases creep in at certain points, understanding what it is and what may be having an influence is the first step to basing decisions on facts.

Often, biases can be split into four distinct categories:

1. Self-deception

First, is the concept of self-deception, the belief that we know more than we actually do.

This self-belief means we may not seek out or miss information that can help us make an informed choice. In a fast-paced environment, where information can change rapidly, it’s important that accurate and up-to-date information is used to support decisions. Failing to find more information can lead to you holding on to outdated data or even information that provides only a single snapshot, rather than the whole picture you need for it to be effective.

In terms of finance, self-deception could mean not seeking out professional help that you could benefit from it or failing to conduct balanced research when exploring investment options.

Challenging what you know and the existing beliefs you may hold can help reduce bias. One of the barriers to this is the sheer amount of information available. Filtering through the ‘good’ and the ‘bad’ to understand what’s important can be difficult and time-consuming. 

2. Heuristic simplification

We’ve all made mistakes when processing information, and this is what heuristic simplification covers.

We’ve evolved to make quick decisions without having to stop and constantly think about what our next course of action should be. A shorter decision-making process can be useful in many situations, but it can also mean certain assumptions need to be made and information is misinterpreted. Linking back to the above point, with more information at our fingertips, making speedy decisions can mean even more data is missed.

Heuristics aren’t a bad thing, imagine how long it would take to get anything done if you deliberated every possibility of the thousands of decisions you make every day. Recognising where you should take a step back and spend time focusing on exploring different options is important to make sure you don’t overlook relevant information.

3. Emotion

Again, we’ve all made emotional decisions in the past. How we’re feeling at the time of making a decision can influence what we decide. As before, this can be useful in many situations but when it comes to finances, a rational, clear-minded approach can help keep you on track.

Stock market movements are a good example of how emotions can affect even the best-laid plans. When stock markets fall, reducing the value of your investments, you may be worried or fearful. These emotions can tell us that our future is at risk and that we should take steps to protect it, such as taking funds out of investments to limit losses. But start with a rational view, and often it’s the case that short-term volatility has been experienced. When you look at the historic movement of stock markets, a downturn has been followed by a recovery. Cutting emotions out of the process can help you see this and what is best for your long-term plans.

4. Social influence

Finally, others can affect our decisions too. This may be family and friends giving their opinion on how you should invest, where to save or your pension, for example. But other sources can have a social influence too. This may include newspapers and online sources. If you read a headline declaring the ‘best funds’ to invest in, it’s not surprising that you’re tempted to follow suit.

The key thing to remember here is there is no one-size-fits-all solution for everyone. A financial decision that makes sense to a family member, or even several people you know, doesn’t mean it’s right for you. Focusing on your circumstances and goals can help minimise the impact of social influence on financial decisions.

Next month, we’ll explore some of the most common biases that could be affecting your decisions. You may recognise some of your own behaviour in them, but it can help you remove bias from your financial decisions.

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While countries are beginning to lift lockdown restrictions, we’re still seeing the economic impact of Covid-19 around the world, as businesses get to grips with the consequences and ongoing social distancing.

According to the OECD, the global economy is set to suffer its worst peacetime slump for 100 years. It’s now expected that global GDP will be -6% in 2020.

In response to the impact, businesses have been shedding jobs. Tens of thousands of workers have lost their jobs around the world, including from well-known names. BP, for example, has cut its workforce by 10,000 globally. Unsurprisingly, with travel being restricted, the airline industry has been one of the hardest hit. IATA, predicts that the industry is heading for a $100 billion loss in 2020/21. Although, travel corridors between countries could provide some relief for the second half of the year.

UK

The UK has seen economic forecasts fall over the last few months, as lockdown has led to businesses closing or needing to change the way they work. However, Bank of England’s chief economist Andy Haldane has suggested things could start looking up. He said we’re now in the ‘recovery phase’ and were on track for a V-shaped recovery, where a sharp decline is followed by a sharp incline. However, he cautioned that it’s still early days and the risk of a surge in unemployment could hamper recovery.

In line with this, the Bank of England announced more economic stimulus, expanding its quantitative easing programme by adding a further £100 billion to help stave off an economic downturn. This addition takes the total programme to £745 billion.

The PMI figures released in June still paint a gloomy picture but do show signs of recovery when compared to a month earlier:

• The UK manufacturing PMI was little changed from May, at 40.7
• The construction sector is also struggling but the PMI did climb from the record low of 8.2 in April to 28.9 in May
• An economic snapshot for the service sector was also gloomy. The May PMI was far higher in May than April, at 29 rather than 13.4, but still far below growth

Consumer debt also indicates that consumers are worried about their financial security. Credit card lending fell by -7.8% in April, as households cut back on their spending. This negative outlook and ongoing restrictions are also affecting the housing market. Mortgage approvals have fallen 90% since February.

While retailers took steps in June, pessimism continued. Some 60% expect consumer demand to be weaker than last year, though the impact isn’t expected to be as severe as it was in May.

Unemployment remained steady in May at 3.9% but it’s thought the government furlough scheme is masking the full damage. Several big companies announced deep job cuts including:

• British Gas owner Centrica is to cut 5,000 jobs
• Aston Martin axes 500 jobs following a slump in sales
• Airbus cuts 15,000 jobs globally, including 1,700 in the UK
• Intu falls into administration, putting thousands of jobs on the line
• HSBC pushes ahead with its redundancy programme that was started before the Covid-19 outbreak. Globally 35,000 jobs will be lost

It seems impossible that Brexit has barely made the headlines in recent months. But the deadline is fast approaching. Boris Johnson has said that Brexit talks will enter ‘hot phase’ from September, with both sides keen to secure a deal this year. So, expect Brexit and the implications to feature more heavily in the coming months and affect markets as a result.

Europe

Figures from Europe painted a similar picture to the UK.

Eurozone GDP fell 3.6% in the first quarter of the year, as the impact of restrictions were felt across the region. Unemployment also rose by 7.3% in April, the latest figure available. However, early signs suggest the slump is easing in some sectors, the manufacturing PMI increased by just 0.1 but remains below the 50 figure that represents growth, at 39.4 in May.

In response to the current uncertainty, the European Central Bank has expanded its quantitative easing programme. It unveiled a €600 billion bond-buying programme, larger than many expected. Purchases will continue until the end of June 2021.

US

The US is continuing to grapple with high levels of coronavirus, affecting business operations. However, unemployment figures fell in June, suggesting businesses are reopening as restrictions are lifted, whether the numbers will fluctuate as some states reimpose measures remains to be seen. With the presidential campaigns underway for the election later this year, unemployment figures are likely to be a key focus in the coming months.

It was also reported that the US is considering imposing new tariffs on $3.1 billion worth of imports for the EU and UK. Goods under consideration include olives, coffee, chocolate, beer, gin and some machinery. It’s a move that’s likely to exacerbate tensions on both sides of the Atlantic.

Asia

China’s PMI rises after the country has suffered three months of contraction. It went from 44.4 in April to 55 in May, with figures about the 50-mark indicating growth. After the country ended lockdown in February, it has continued to post modest growth in factory output, PMIs show.

However, one area of risk to the Chinese economy is the geopolitical tensions with Hong Kong. Earlier this year, this was marked by mass demonstrations and protests in Hong Kong. Now the immediate health concerns of Covid-19 have abated, the protests have begun again.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

After Covid-19 forced millions of families to cancel holiday plans in spring and early summer, heading abroad is now an option again. However, strict measures are still in place and if you’re planning to book a trip in the coming weeks, there’s more to think about than usual.

When Boris Johnson announced the hospitality sector in the UK could reopen in early July, there was a surge in bookings for UK destinations. Even travelling in the UK with social distancing in place can be far more challenging than usual and you may not be able to participate in usual holiday activities. Despite this, a trip away, whether in the UK or abroad, can be a chance to escape after months of travel restrictions.

If you’re hoping to get away this summer, there are some key things you should keep in mind.

1. Not all destinations are open to UK residents

You might be keen to plan a trip to your favourite destination, however, not all countries are allowing UK travellers to enter or may be enforcing a quarantine period when you arrive. At the end of June, for example, Greece suspended all holiday flights arriving from the UK.

The UK has agreed to air bridges, also known as travel corridors, with some countries. These allow smoother travel between two countries without having to quarantine in either direction. Places with air bridges with the UK include Germany, Italy and Spain.

These air bridges are dependent on both countries maintaining relatively low levels of Covid-19. As a result, a spike in cases could force travel firms to cancel booked holidays again. Keep in mind that a destination open to the UK now, may not be next month.

2. A quarantine period after travelling may still be needed

Depending on where you’re travelling to, you may need to enter a two-week quarantine when you arrive back in the UK. Countries are being given a traffic light system colour, those that are ‘green’ or ‘amber’ do not require a quarantine period. However, those being categorised as ‘red’ do.

There are two things to consider if you want to book a holiday to a ‘red’ location. First, it indicates the country has a high level of Covid-19 cases, which could affect your health. Second, if you need to take time off work, and are unable to work in isolation, you’ll need to factor the quarantine period into this.

3. Countries have their own social distancing measures in place

Don’t go on holiday expecting it to be ‘business as usual’. Much like the UK, many countries have social distancing measures in place, some of which are stricter than the UK.

Usual activities such as hitting the swimming pool, visiting tourist spots or eating out may not be an option. So, while booking a holiday is possible, it might not be the trip you envisioned. Be sure to research the destination you’re planning on going to, including whether you need to wear a mask, social distancing guidelines and what will be available for you to do. Where entertainment and social venues are open, numbers of people will likely be closely monitored, so make sure you book in advance where possible to avoid disappointment and long queues.

4. Travel insurance won’t cover Covid-19

Travel insurance is an important part of providing security when you travel, from covering potential medical costs to providing a refund if a holiday provider cancels. However, the majority of travel insurers have now added a clause, which excludes claims due to Covid-19. Therefore, you won’t be protected if your holiday plans are disrupted by the pandemic. Keep this in mind when booking providers, such as hotels, and make sure you understand the individual refund policies they offer.

If you’re going on a holiday that was pre-booked before the pandemic and insurance was taken out before the changes were made, you may still be covered. Check your policy documents and get in touch with the provider to fully understand where you stand should you need to make a claim.

5. The situation continues to change rapidly

Finally, the situation around Covid-19 has been changing rapidly over the last few months, with governments responding accordingly as cases rise and fall. As countries begin to come out of lockdown and ease restrictions, no one can guarantee what will happen. Even the best laid holiday plans may be knocked off course by events and decisions that are out of your hands. If you do decide to book a holiday, make sure you keep up with developments and be prepared for changes to be enforced either in the UK or the destination you are visiting.

Do you know when you can access your pension? Research has found that the number of people trying to access their pension early is on the rise, and it’s a misconception that scammers are taking advantage of.

Accessing Defined Contribution pensions

It’s important that you understand when and how your pension can be accessed. It means your retirement plans are based on accurate information and it can protect you from scammers.

If you have a Defined Contribution pension, where you and your employer make regular contributions and the savings are invested, your pension is usually accessible at the age of 55, this will rise to 57 in 2028. Accessing your pension before this point is only an option in exceptional circumstances, for example, following a terminal diagnosis.

When you reach 55, there are several ways your pension can be accessed. This includes purchasing an Annuity to create a guaranteed income for life or taking an adjustable income, where you’re responsible for ensuring withdrawals are sustainable. It’s important that any decision about your pension is carefully considered, some decisions cannot be reversed and can have a long-lasting impact on your retirement finances.

Spike in pension savers trying to access pensions early

Despite pensions not being accessible before 55, figures show that some savers are trying to access their pension early. In some cases, this is many decades before retirement age.

According to online pension provider PensionBee, the number of people looking to withdraw their pension before the minimum age has increased six-fold in just three months. In December 2019, five people attempted to access their pension early by March 2020 this had increased to 31. Worryingly, the median age for people seeking to access their retirement savings early was just 35.

There are many reasons why people may be seeking to access their pension early, but one concern is that they’re being targeted by fraudsters taking advantage of a lack of awareness and worries about financial insecurity caused by coronavirus.

It’s not just those that are younger than the pension age being targeted by scammers either. Any significant event, like Covid-19, can lead to a rise in fraud and new types of fraudulent activity. It’s easy to see why pensions are targeted by criminals. They’re often one of the largest assets you own and, if retirement is some way off, the scam may go unnoticed for many years.

Previous figures from the Financial Conduct Authority (FCA) highlight just how devastating pension scams can be. The average amount victims lost was £82,000, a sum that would have taken years to build up. With a quarter of people (24%) admitting they took 24 hours or less to decide on a pension offer, decades of savings can be lost in a day.

In many cases, it’s impossible to recover lost pension savings and you may have little opportunity to build years of savings back up. Understanding your pension and the way fraudsters operate could save your retirement.

Spotting signs of fraud

Knowing when you can access your pension can help you spot when fraudsters are behind offers. There are common signs that you’re being targeted, including:

• Offering to ‘unlock’ your pension: ‘Unlocking’ is often a phrase fraudsters use when claiming you can access your pension before turning 55. As mentioned above, this isn’t possible in the vast majority of circumstances. If you believe your case comes under the exceptional circumstances, you should contact your pension provider directly rather than going through a third party.
• The offer of a ‘free pension review’: At the point of retirement, you have to make some big decisions about your pension and how you access it. It’s natural to want support and it’s strongly recommended that you seek professional advice. The offer of a free review can certainly be tempting but it’s often used by scammers to gain your trust. Before you share any personal details, make sure the person or firm you’re dealing with is legitimate by checking the FCA register.
• Claims of guaranteed returns: As pensions are typically invested, and may continue to be even once you start accessing savings, returns may play an important role in retirement plans. As a result, it’s not surprising that scammers offer guaranteed or high returns when trying to persuade you to hand over money. Remember, all investments involve risk and there are no guarantees when investing. If it sounds too good to be true, it probably is.
• Unusual investment propositions: Investing can be filled with jargon and may seem complex, criminals take advantage of this by offering unusual investment options, often while claiming they’ll deliver higher than average returns. Don’t invest in anything you don’t understand and keep an eye out for common scams such as overseas properties or forestry developments.
• Pressure to make quick decisions: Investment decisions will have a long-term impact on your retirement. Don’t be rushed into making any decisions and always take some time to fully consider your options. Scammers rely on you making snap decisions without fully thinking through the consequences, genuine advisers you want to work with will understand why you want to take some time and will be happy to go through your options.

If you’d like to discuss your pension and how it can deliver an income in retirement, please get in touch.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rate at the time you take benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

Coronavirus has affected many aspects of our lives and research shows that savings are one area that may have been affected. Whether you’ve had to dip into savings or have been able to put away, it’s important to look at your financial plan to ensure you’re getting the most out of your money.

According to research from Aegon, six in ten peoples’ savings have been affected by the pandemic in some way. These people are split into two distinct categories:

1. 31% of savers reported they have increased savings during lockdown as other costs, such as commuting to work and entertainment were cut. On average these savers increased the amount they put away by £197 per month.
2. In contrast, 28% of savers said they’d been forced to reduce the amount they were saving each month or stop saving altogether. On average, savings were decreased by £159 per month.

Steven Cameron, Pensions Director at Aegon, said: “While coronavirus is first and foremost a health crisis, it is having a big impact on the nation’s wealth. Our consumer research shows six in ten of the population have changed their savings levels since the start of the crisis with a stark divide between those who have been able to save more because their expenditure in lockdown has reduced and those who have had to cut back or stop regular savings. If this divide in savings patterns continues for any length of time, it will have a big impact on the future financial security of different groups.”

Unsurprisingly, employment status had a big impact on whether savings were cut or boosted. Those needing to cut back are more likely to have been furloughed, potentially meaning taking home just 80% of their normal salary, or self-employed as income may also have been affected. While support is available for self-employed workers, they’ve typically had to wait longer for this to come through.

On the other hand, those that have remained working throughout the lockdown, either as keyworkers or from home, are likely to have maintained their income while seeing other outgoings decrease.

If your saving habits have changed, it’s important to review this in line with your financial plan. What steps you should take will depend on which of the categories you fall into.

Saving more during the pandemic

If you’ve been in a position to save more during lockdown, it’s worth looking at where your savings are going and if it’s the most efficient place.

Interest rates are low at the moment, which can mean your savings are losing value in real terms over the long term. If you already have an emergency fund established, ideally with around three months’ worth of outgoings in a readily accessible account, you should look at the alternatives. This may include a fixed-term savings account, where your money is locked away for a defined period, or investing if appropriate for your goals.

When looking at where to place your increased savings, it’s important to keep your goals and overall financial plan in mind. While investing can be a way to increase value over the long term, it’s not appropriate if you’ve decided to save for a holiday next year, for example.

Saving less or using savings during the pandemic

If your saving habits have been negatively affected by coronavirus, it’s important to understand the impact.

You may have been forced to dip into your emergency fund, for instance, depleting your usual safety net. First, you shouldn’t feel guilty about doing this, after all, you’ve put that money aside to help you weather unexpected events. However, you should keep track of what is being used and how you’ll replenish savings once you’re in a financial position to do so.

Where your regular savings have been reduced or halted, the long-term impact is something that should be considered. In many cases, a few months of lower saving contributions are unlikely to have a huge impact on financial security in the long term. But it’s worth assessing if goals are still within reach to provide peace of mind. You may find that increasing savings once you’re able to or delaying plans for a while is necessary.

While lockdown restrictions have eased, some workers are finding their routine will remain disrupted in some way in the coming months. It’s important to review your financial plan in light of personal changes if needed, it can help keep you on the right track.

It’s not just savings that Covid-19 may have affected in terms of finances either. The pandemic caused short-term volatility in stock markets which may have impacted investment portfolios and pensions, for example. If you have any questions about your financial plan and goals, please get in touch.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

When you think about your lifestyle goals and financial plan, how far ahead do you look? It wasn’t so long ago that planning to reach 80 meant you could be sure of financial security throughout your life. But now, it’s becoming increasingly common to celebrate your 100^th birthday, bringing new challenges to planning.

Just a century ago, 1% of babies born were expected to live to 100. As healthcare and a range of other factors improved, life expectancy has increased too. If you’re a female aged 60, there’s a 12.3% chance of turning 100, for 60-year-old men it’s 8.1%. If you’re 40 the chance of reaching 100 are even greater, at 18.7% and 13.3% for women and men respectively.

While improving health conditions are certainly positive, living longer lives means we need to change lifestyle too.

Changing lifestyles

When you think about preparing to live longer, it may be money that springs to mind first. After all, a longer life means you’ll need to establish financial security that will last longer, probably with a longer time spent in retirement. But as with all financial plans, your goals and lifestyle should remain at the centre.

Previously, life was broadly split into three stages of education, working and retirement. We’re already seeing these stages change. It’s now far more common to find people transitioning into retirement, spending time on education in later years, or going back to work in some form after retiring. 

You might be able to retire at 65, but would you want to spend 35 years in retirement? For some, this sounds ideal, but for others, it’s a long time not to work in some way, whether that’s through traditional employment or starting their own business.

Planning for a 100-year life should start with thinking about how you’d like your life to look.

• What are your goals at 60, 70 and beyond?
• When would you like to retire, and would you prefer to transition into retirement?
• What makes you fulfilled?
• What are your priorities now, do you expect them to change?

Of course, these lifestyle goals aren’t set in stone. In fact, regularly reviewing them and seeing if they still align with your aspirations and circumstances is important. But having an idea of what you’d like to achieve can provide direction and confidence.

Longer lives mean rethinking traditional lifestyle models, it’s a chance to think about what you want.

Managing your finances for 100 years

While goals and lifestyle aspirations are essential, we can’t ignore the fact that finance plays an important role in achieving this. Planning for a 100-year life presents new challenges.

It can be difficult to understand how personal wealth will change over a 10-year period as you need to factor in a range of areas, from investment performance to inflation. When looking at a 100-year life, you may be considering these factors over several decades, making it even harder to gauge how wealth can change and what’s sustainable.

This is where financial planning can help. Using a range of tools, we can help you bring together lifestyle aspirations with your current financial situation. It’s a step that can help you understand how your wealth will change depending on the decisions you make, whether that’s contributing more to your pension for a longer retirement or using a lump sum to tick something off your bucket list.

As we live longer, finances naturally need to stretch further and can become more complicated, and financial planning becomes even more important.

Planning for the next generation

As you consider life expectancy and financial planning, you may be considering what you’ll leave behind for loved ones.

Considering how our finances would hold up during a 100-year life is important for us all as it becomes more common. But it’s even more crucial when helping the next generation plan. One in three children born today will live to see their 100^th birthday. It won’t become a rare milestone, but the norm. As a result, planning for a 100-year life needs to become the norm too.

You may be in a position to help children and grandchildren, whether it’s passing on knowledge or making regular pension contributions on behalf of a child. Small steps taken in the early years can help create a solid foundation that can be built-on, including learning positive money habits.

As you set out your own financial plan, this should include the inheritance you intend to leave behind. It can help you understand how loved ones will benefit and ensure the necessary steps are taken, such as writing a will or reducing Inheritance Tax liability. It’s a step that ensures your wishes are carried out and can help loved ones prepare for longer lives too.

If you’d like to discuss how your wealth will change over time, please get in touch.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.